Merkel Rules Out Bailout For Deutsche Bank: Depositor Bail-In Coming Up?

Tyler Durden's picture

Submitted by Mish Shedlock of MishTalk

The €42 trillion (notional) derivatives mess known as Deutsche Bank remains under severe pressure. Its market cap is $17 billion. It has no earnings and pays no dividend.


On April 23, Deutsche Bank was Fined $2.5 Billion over LIBOR rate rigging. Twenty-one people face criminal charges following a seven-year investigation.

On September 16, the US Department of Justice Fined Deutsche Bank $14B for mortgage securities fraud leading up to the 2007-2009 global meltdown.

Today, German Chancellor Angela Merkel Ruled Out Assistance for Deutsche Bank.

No Comment

Chancellor Angela Merkel has ruled out any state assistance for Deutsche Bank AG in the year heading into the national election in September 2017, Focus magazine reported, citing unidentified government officials.


The German leader also declined to step into the Frankfurt-based bank’s legal imbroglio with the U.S. Justice Department, which may seek as much as $14 billion in sanctions against Deutsche Bank’s mortgage-backed securities business, the magazine said. A German government spokesman declined to comment on the report Saturday. A Deutsche Bank spokeswoman also wouldn’t comment.

Understanding the Fine

The Guardian reports $14bn Deutsche Bank Fine – All You Need to Know.

The prospect of a $14bn penalty from the US Department of Justice has rattled investor confidence in Deutsche. The penalty aims to settle allegations, dating back to 2005, about the way the bank selected mortgages, packaged them into bonds and sold on to investors. These bonds are known as residential mortgage-backed securities (RMBS).


Can Deutsche Afford the Bill?


Deutsche Bank has been quick to describe the fine as an “opening position” from Washington. It is easy to see why. It would be one of the largest ever fines levied by the US. It could also strain the bank’s finances. For 2015, the bank reported its first annual loss since 2008 and could be heading for another loss this year regardless of the threatened justice department fine. According to Tomas Kinmonth, an analyst at Dutch bank ABN Amro, a settlement on that scale could impede Deutsche’s ability to pay coupons – or regular interest payments to investors – on a special type of bond. The bonds are known as AT1s, which are intended to shore up Deutsche in a time of crisis.


The bank, though, has made clear it has no intention of agreeing to a fine at this level and has stressed it has the resources to keep making payments on the bonds until 2017, at least. However, one analyst told Reuters that any fine topping €5bn would force it to raise fresh funds in the financial markets by tapping shareholders for cash.


Is this the end of Deutsche Bank’s regulator troubles?


The bank has set aside €5.5bn for litigation costs but does not spell out exactly what that sum is for. It is battling more than 7,000 legal cases, although the ones gaining most attention are the RMBS case and one relating to activities in Russia, where the bank is facing an investigation into so-called mirror trades, where clients bought shares in Russia and simultaneously sold similar shares abroad in foreign currency. Regulators are investigating whether or not these trades skirted international sanctions against Russia by turning Russia-held roubles into dollars held outside the country.


Could other European banks be affected?


Deutsche is the first European bank that appears to have started talks with the DoJ over RMBS. Barclays and the Swiss bank UBS are among others waiting for settlement talks to be concluded.

Cooking the Books?

On September 20, I asked Is Deutsche Bank Cooking its Derivatives Book to Hide Huge Losses?

One reader commented:

German Banks do not get to net long and short derivatives under the same ISDA [International Swaps and Derivatives Association agreement] to the extent that US Banks do. The Germans like to see the courts having agreed that netting is applicable under an ISDA in a few bankruptcies before they allow for ISDA netting in reg reporting. So as a starting point German banks always look worse on paper. So if DB is long a swap with JPM and short the same swap with JPM it could show up as having one side as exposure, when in reality it has near zero exposure. US Courts have accepted ISDA netting agreements as valid. Likewise if DB is long a swap and short the futures strip (thus having only a relatively small basis risk) that also probably shows up as 1x the exposure as opposed to near zero.


What is worse, all the big banks have less than perfect reporting systems. They fail to fully net the internal corporate relationships and thus DB can be long and short to itself and record both sides of the internal trade as ‘Gross Notional Assets’. Do this a few hundred thousand times, and not get around to tearing up the matching contracts and Gross Notional Assets balloon to the moon. Why would they want to let this happen. Partially it was because Banks didn’t care about Gross Notional Assets before the Great Financial Crisis, and partially it was because idiots in the ‘C’ suite liked to talk about how ‘big’ they are.


DB needs to get its netting under control, they need to do tearups of back-to-back contracts that don’t get netting benefit, and most importantly they need to get costs under control.

Depositor Bail-In Coming Up?

In a September 21 Veritaseum article, Reggie Middleton provided an analysis of Deutsche Bank’s likely recapitalization effort while asking German Tax Payer Bailout or German Bank Depositor Bail-in?

Deutsche Bank is going to need some money, and it’s going to need some quite soon. The next two or three articles that I write will focus on why there is such a need. In a concerted effort to reduce or potentially eliminated the risk of taxpayer-funded bail-outs of European banks, the EU implemented a new “bail-in” regime beginning on January 1, 2016. As such, rules which require banks and certain systemically significant market participants in EU member states will have to write-down, cancel, convert into equity or otherwise modify certain unsecured liabilities if such steps are required to recapitalize the institution. What is the most bountiful unsecured liabilities of a bank?

Middleton noted Deutsche Bank has over $2.5 trillion in derivatives exposure that needs to be rolled over.


Is this a net-zero non-problem or is Middleton correct with his claim “Even without market losses (and there’s plenty of reason to believe those are coming), DB will have a hell of a time with added credit expenses due to its lower credit rating (use both rating agencies and bank’s internal scoring models)”

Pointing to an image I posted, Middleton says …

There will be some losses and conflict upon resolution of some of these. How do we know? We believe have identified the counterparty of DB and it has booked a profit for the derivatives that DB booked a loss for. Of course, that loss was booked before DB changed their valuation methodology, which now makes it a profit. Hat tip to Mish’s Blog


That’s the image I posted on September 20.

Middleton commented ….

Almost 50 % of Deutsche bank’s risk profile (both risk weighted assets & Economic Capital) is dominated by their Corporate Banking & Securities Division, mostly because of the trading activities related with this division.


Noticeably, in first quarter of 2015 Deutsche Bank adopted a new methodology to determine “Diversification benefit”, resulted in an overall reduction of risk by 2.3 billion euros from 2014 to 2015. Though because of this new methodology Deutsche Bank’s total risk reduced significantly but, the methodology for the calculation of diversification benefit is not mentioned in their Annual Report. Without that it cannot be clearly substantiated whether Deutsche Bank is shuffling bad loans to a different unit and classification in order to make their NPAs look better. One thing is for sure, it definitely does look fishy!


Do you know what smells even fishier? The high probability that DB uses this “new found risk calculation metric” to determine the cost of capital for their level 2 and level 3 assets. Voila! Instant profits, Mr. and Mrs. Investor! Yeah, right? You see, DB counterparties are not going to want a hyped up model input as payment, they’re probably thinking more along the lines of cash. Add to this, the 50+% drop in share price, .25x BV multiple, and the multiple lawsuits, including the DOJ’s request of $14B dollars (from a $17B market cap), and you have a pretty stringent need for a recap. I will supply even more (actually, much more) fodder for capital contemplation of the nest week. Of course, no one is bringing this point up except for us. I could very well be wrong, I just wish for someone to show me where.

Guessing Game

We are all guessing. Here are two of my guesses.

  • Deutsche Bank’s problems go far beyond the fines.
  • Its derivatives mess is so tangled that it may not know itself where it stands.

Questions Abound

  1. What is Deutsch Bank’s exposure to the collapsing Italian bank system?
  2. What is Deutsch Bank’s exposure to other troubled European banks?
  3. Is Deutsch Bank Prepping for an Avalanche of Fraud Charges on its Gold Derivative Products?
  4. If a depositor bail-in is not coming, how can Deutsche bank pay the fines now that Merkel ruled out state aid.

Depositors beware!

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NDXTrader's picture

No worries, the Fed will bail them out like they did in 2008

Looney's picture


Germany can always borrow some money from… Greece?   ;-)


I M DeMan's picture

Debit the shareholders.

researchfix's picture

But you cannot bring these fine people, shareholders and depositors to the truth of the financial system: That there are losers. They put all their hard work, taxevading and cheating into Deutsche Bank. Help, Mutti, help...

Neil Patrick Harris's picture

The fine is just a negotiating tactic to help Apple avoid their own $14 billion bill.

BaBaBouy's picture

I Have Just 1 Question ~~~

HOW MUCH Of That $42 Trill Is GOLD Shorts ????????

oops's picture
oops (not verified) BaBaBouy Sep 24, 2016 9:29 PM

They always find a way to keep the Pyramid of Power intact.

remain calm's picture

Bullish. DB up 3% Monday.

BetaGap's picture

Murkle will do whatever it takes... to take down the country and people she hates so much

Manthong's picture

Ack due Libor..

Gitten mitten der Douchenbanken undt franken mit der Vienershnhitsel uppen das bungen hollen mit nein greasen schloppen.

I’s be speaking black as well as de germanish.


cart00ner's picture

Ich spreche kein deutsch arschloch!

TsyFox's picture

What Merkel said today regarding DB is in reality a response to Italian PM Renzi, who actually threatened to cause a German financial crisis if he doesn't get EU acquiescence for his banking recap plan. The Italian plan basically pushes the EU to fund Italy's deficit, in defiance of the EU's No Bailout Rules.

Germany is in effect daring the rest of the world to go ahead, push DB into an insolvency. Germany will respond by following the rules and Bailing In depositors beyond a certain amount, of which most will be foreigners, as will be the bondholders. Germans know the rules and have their deposits spread out among various financial institutions, most of whom are very healthy. As for the massive derivatives book, whatever doesn't net out will be the problem of the FED and ECB.

Then the ball will be back in Renzi's side of the court. Following a Bail In at DB, the Italians will have no choice but to follow EU rules and begin Bail Ins at Italian banks, almost all of which are insolvent.

In summation, Merkel has just brilliantly checkmated the amateurish Renzi.

tunnelvizn's picture

And bring DB to its knees? This is WINNING?

Bail-ins are not without massive risk and would be unparalleled in this instance.

Due to the interconnectivity of the derivatives, NO ONE will know how the netting will shake out!  There are soooo many "investors" on one side of the boat, with the CBs holding down the other side.  One slip by either and its "What are you zinking about".  This is a canoe not an outrigger.

Yeah, its a dangerous game - got your big-boy pants on?

Omen IV's picture

Duetche should threaten the DoJ with taking down the Reichsstag- and the NY banks with it

Call it a modern day - Hollicost



Bay of Pigs's picture

DB stock was $146 in April of 2007. Now at $12.75 and hit an all time low of $12.40 this past week.

This bank is toast.

813kml's picture

Those junk bond derivatives are yielding 100 megatons.

lincolnsteffens's picture

Citi Group is down over 90% from its high in 2000. Add inflation to that mix and what do you get? Shit storm. I wonder if Citi owns a chunk of DB and vice versa? How's that working out compared to the asset that pays no dividend - GOLD

This is what is known as an economic recovery in the banking sector. 

JackT's picture

What happened to the $2T of derivatives that were supposedly offloaded US Banks earlier this year?

mkkby's picture

Article is bullshit.  Not a Merkel comment -- UNNAMED GOVT SOURCES.

Something stinks here.  One of the largest banks, with derivatives in the trillions -- about to go kaput...  yet nobody is selling out of the stock or bond markets.  On paper, this should make Lehman look like a picnic, but nobody's worried.

What stinks is Mish's analysis.  Nobody has any idea what's under the covers, but somehow he makes dire predictions???  The back and forth fines are political.  Will be worked out over a few phone calls.

Paul Kersey's picture

A depositor bail-in would be unthinkable, because, not only would it result in a depositor bank run on Deutsche Bank, but that kind of bank run could be contagious enough to cause bank runs on many big banks. The world's Main Street economies are already fragile enough so that a series of bank runs could cause an epidemic of international economic collapses. The TBTF banks will do whatever they can to stem that tide.

After all, who can forget what happened back in 2008, when Primary Fund, which had almost $65 billion in assets at the end of May, "broke the buck". It ended up with Ex-Goldman Sachs CEO Hank Paulson, acting in his capacity of Secretary of the Treasury, literally on his knee begging Nancy Pelosi to pass his TBTF bank bailout bill.

jcaz's picture

The smart money will be standing in line out front come Monday morning-  they'll be illiquid by 10am.

This deal is already over,

Arnold's picture

Bank Of Bailins --- A Gated Community

Winston Churchill's picture

That call by Rickards of a finaincial reset on Spt.30th @4pm EST suddenly doesn't look quite so silly.

By Friday, whats left ibn my various bank accounts will be about a $100 in each.

Tall matresses.

lincolnsteffens's picture

If I was sure US Postal Money Orders were safer than small banks I would buy a load and pay the fee. I'm just worried that even though the USPS employees pension fund is fully funded that a significant portion could go pfffft and the money orders get bailed in.  Way too hard to know what is safe. If I only had a few billion bucks I could spread the risk over the globe.

walküre's picture

Limit down. Monday is Black Monday

FinalEvent's picture

My name has been waiting for it.

Heterodox economics's picture

It just occurred to me--suppose that something bad happens to Clinton at the debate.  It doesn't have to be as bad as a fainting spell--say slurring her speech, or even just having a bad performance.  The Powers That Be might just drop the markets

Scuba Steve's picture

Tuesday you mean because of debate ... OR debate postponed because of market limit down all day, emergency Economic meetings?

convenient for the witch.

Heterodox economics's picture

I agree with your point.  Another consequence of a bank bail-in--where depositor's money are swiped--is that it may lead to social unrest.   Incumbent politicians voted out of office, protests, even violence.

funkyfreddy's picture

I dont understand why those who will be negatively affected by this always react so slowly. Bail-in now looks absolutely the most likely outcome so why hasn't a run already started?

Same happened in cyprus - it was innevitable yet most waited until it was too late to moan about it. Same in Greece with the currency controls - innevitable but they waited anyway until after the event to stand in line to be told they couldnt have their own money back.

Bail ins should not work. Those affected should see them coming and get out before it happens making bail ins unworkable.

RawPawg's picture

Call England,and see if they can Spot Ya till next Payday

hehehe..even i crack myself up

Last of the Middle Class's picture

Told Englad they would hold a 10 (trillion) for them till payday.

larz's picture

The Cyprus solution coming to a bank near you Amerika. Pay close attention. Turn off dancing with the stars and Monday night football and pay attention

kiwimail's picture

You are absolutely right Larz. And coming to a bank near me as well.  Once one depositor gets bailed in anywhere in the world it will be all on.  Fiat is totally based on faith and once that faith is questioned it's all over!!! New Zealand was one of the first countries to adopt the bail-in regeime and I immediately started moving funds out of the system. Phyz in posession is the only safe haven.

VWAndy's picture

 Bailing out a bank is kinda bailing out the government when you look at it in its most basic terms. This is how they power the gravy train. Sick bas tards.

lester1's picture

No worries. The ECB or Federal Reserve will bail them out.

What's to stop them ?

buzzsaw99's picture

this too, is bullish.

falak pema's picture

let the dead bury the dead banksters.

Dragon HAwk's picture

They're Broke, they just can't quite seem to figure out how to Tell the Public yet,  the old  Mom is up on the roof Joke comes to mind, you know  break it to people slowly

Last of the Middle Class's picture

You know you're fucked when you're boss starts off the conversation with "We're going in a different direction". I'd definately go in a different direction if I was a depositor of DB.

Arnold's picture

DB is a Primary Dealer, so technically you are a bondholder in a fashion.

wmbz's picture

Just plain bullshit rolling off of Sow Merkles fat tongue.

When the shit hits the fan "they" will bailout Douche Bank. Listen to what they say, and watch what they do! Same as it ever was.

opport.knocks's picture

As dominoes go, this is a big one.

Herdee's picture

Get your electronic /digital fiat paper currency out of that bank NOW or face the same "BAIL-IN" conditions that the Cyprus test run produced.The ECB really screwed a lot of people out of their life savings in Cyprus and the G7 countries have all got the legislation passed and in place.And there's nothing you can do to get your savings back when your hard earned currency is stolen by Central Bank Crooks.It is designed to protect banks,not you as a depositor.Actually,the way it works is that when you deposit currency in a bank you are actually giving the bank a loan.A loan to a possible insolvent entity that knows that you are an unsecured creditor.In other words,bankers have your politicians as slaves to do their dirty work for them.

walküre's picture

All German banks are on the hook. There are a couple trillion sitting in savings accounts at German credit unions alone. All Germans should remove their money from any German bank ASAP.

Convert to US Dollars and Gold - ASAP

There is NO safe heaven inside Germany, possibly not even inside the EU.


EU full on meltdown and breakdown coming.

Get your money out!

azusgm's picture

Followed quickly by Japan.

TsyFox's picture

You Are Just OH SO WRONG...

Almost All German Banks Are In Excellent Shape.



Merkel has checkmated Renzi, and his crude attempt to deflect the Italian Banking Crisis to Germany.